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Strongest week since May for European shares as Fed tone spurs relief

Construction stocks drop, banks wilt.

LONDON – European shares had their strongest week in more than two months as investors piled back into equities on signs that the world’s major central banks would likely not tighten monetary policy as quickly as some had feared.

The move on indexes on Friday was more muted as investors digested disappointing earnings reports from major US banks including JPMorgan and Citigroup, which sent banking stocks lower.

The pan-European STOXX 600 index inched up 0.1% while euro zone bluechips fell 0.2%.

“In Europe, we’re still not dealing with any higher interest rates, which should be benefiting the US (banks) slightly in terms of net interest margin,” Mike van Dulken, head of research at Accendo Markets, said.

“That said we’ve still got the supportive QE helping, but yields are still low, which is not great for the banks.”

Flows data showed investors rushed back into equities this week as the Fed’s tone rekindled their enthusiasm for riskier assets.

Firmer metals prices underpinned gains on mining stocks on Friday.

Miners were led to a three-month high by steel firms Outokumpu, ArcelorMittal, and Tenaris which rose after US President Donald Trump said that he was considering quotas and tariffs on Chinese steel dumping.

Analysts at Barclays said they remained positive on the European mining sector, which has gained just 4% so far this year after rallying more than 60% in 2016.

“Chinese rates are falling, demand indicators across the economy appear healthy, industry capex discipline is holding, M&A is generally off the agenda, and resulting strong cashflows are being utilised for balance sheet reconstruction and distributions to shareholders,” Barclays analysts said in a note.

While a rise in bond yields has hit rate-sensitive sectors such as utilities, banking stocks have benefited.

On Friday, however, the sector was under pressure as earnings from major US banks disappointed, and CPI data indicated inflation in the US was slowing, potentially putting a dampener on the Fed’s monetary policy tightening plans.

Banks gain when interest rates rise, widening their margins.

Euro zone banks fell 0.7%, leaving them unchanged on the week after a strong performance last week.

Swedish lender SEB jumped 1.3% after its second-quarter profit topped forecasts.

Other Nordic stocks were also in focus as Norwegian insurer Gjensidige slumped 6.5% to the bottom of the STOXX 600 after its second quarter results came in below forecasts.

It was joined by Swedish construction group Skanksa , which dropped nearly 5% after it warned that its second-quarter profit would be hit by project writedowns in the US and Britain.

European earnings get underway in earnest later this month. Overall, analysts are calling for about 9% year-on-year earnings growth for top European firms, compared to about 8% for the US, according to Thomson Reuters I/B/E/S.

 

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